Q: Why is investing globally important?
A: We think geographical boundaries that constrain people’s investment universe are artificial. Increasingly, with globalization most companies’ businesses expand well beyond their country borders. So if an investor wants to find the best investment opportunities it seems smart to look globally. As you look around the world, companies are less correlated with their countries and more with their sectors and that will only continue in the future. Moreover, the global economy is no longer leveraged to the U.S. economy as before and even emerging economies are quite robust.
Q: What is your investment philosophy?
A: Our global investing universe consists of mainly large and mid-cap companies. We use a bottom-up stock selection approach to identify underpriced stocks around the world. We tend to shy away from macroeconomic calls.
Common behavioral biases and market forces result in stocks that can sell well below their intrinsic value. We use an analytical process that blends quantitative and fundamental elements to identify these market mispricings, which we believe will deliver consistent returns. Our primary goal is to outperform our benchmark - the broad global, Morgan Stanley Capital International World Index.
The term “world” for us is synonymous with “global” and includes both the U.S. and non-US companies. Consequently, our fund has invested globally in markets across the U.S., Japan, Canada and in the European Union. We have a small exposure in emerging markets.
Q: What is your investment strategy?
A: Stock selection is the key to our success in achieving consistent returns and outperforming our benchmark and this involves blending in-depth fundamental analysis with rigorous quantitative analysis.
A proprietary discounted cashflow model is the key input in our fundamental analysis in estimating the intrinsic value of each company. On the quantitative side, our model is composed of 25 individual metrics that fall into four categories. They are relative value, where a company’s current price is compared to different measures of economic and financial health; earnings momentum, where we look at sell-side changes to earnings forecast and cash flow forecast over the next two years; price momentum,which is positive momentum overthe last twelve months, and financial fundamentalstatistics and quality; which islooking at how efficiently companies usetheir capital.
These quantitative tools enable us tostudy in depth and filter through our universeof stocks. With our fundamentaltools, we are able to make individual assessmentsof stocks in order to confirmwhat our quantitative models indicate, orget additional information that may revealthat the particular stock does notmeet our criteria.
Q: Can you walk us through your researchprocess?
A: We have over 50 research analysts.The majority of them are located in Boston,but some are based in London andTokyo. They are industry-based analystsand contribute to various Putnam products.Each analyst covers roughly 30companies in depth. The team leveragesa proprietary discounted cashflowmodel, which provides “forward-looking”attractiveness/unattractiveness scorefor each company. Their job is to provideinformation over and above what we mayglean from our quantitative models. BradGreenleaf and his team of quantitativeanalysts focus on developing quantitativetools culminating in model portfoliosthat can outperform their benchmark.These models are incorporated in theportfolio and combined with our fundamentalanalysis to build a fund that webelieve optimizes the balance of returnand risk.
Q: What process do you follow tobuild your portfolio? What is yourbuy and sell discipline?
A: We follow a three-step portfolio buildingprocess. Step one is screening, steptwo is analysis, and step three is portfolioconstruction.
Under screening, we first rank every oneof our potential investable companies ona fundamental metric. Ranking is doneon standard deviation basis plus three tominus three. At the intersection are companiesthat are attractive on both quantitativeand fundamental basis so thatthey have multiple attractive metrics.Beginning with our universe of 10,000listed companies, then 2,500 investablecompanies, we end up finally witha trimmed down list – our buy list - ofbetween 100 and 200 companies thatwe focus on.
Next, we analyze companies in the buylist and spend time on understandingtheir businesses, meeting with managements,analysts, both internally as wellas externally and deciding whether weshould add the company to the fund oradd it to the exception list.
Those exceptions come in multiple flavors,such as “do not buy” or “we don’tagree”, so we will not buy them. Thenthere’s the “do not buy more” list, whichare companies that we feel we alreadyhave enough exposure to. There arecompanies that are already in the portfoliothat for a set of reasons are in the“do not sell” list. And then there’s the“must buy” list of companies or sometimes“must sell” names. Those are thesets of lists that we combine to call “theexception list”.
The last step leads to portfolio construction.Here, we take our existing portfolio,the buy-list of 100 companies, and the‘exception list’ and put all of them intoa BARRA risk-based optimizer. The optimizeranalyzes the information and generatesa set of trades that help in buildinga portfolio based on risk-adjustedmaximum returns possible. If we don’tagree with some of the trades, we againupdate the “exception list” and re-runthat optimizer. Every fortnight, we operatethis three-step process and also turnover about 3% of the portfolio. In the interimperiod, we again analyze the companieson the “buy list.”
This process is thus quite different from the traditional “push-based” approach, where money managers receive different recommendations from the brokers and analysts with their sets of buys and sells, and from the companies themselves. We adopt the “pull-based” model where we take a look at what’s attractive in the market, and then meet with those companies and their analysts which we believe will be more successful in stock selection.
Q: At any given time how many stocks do you have in the portfolio?